Advanced: Calculation of target sales required to meet the objectures specified by the Management Board of a theatre A theatre with some surplus accommodation proposes to extent its catering facilities to provide light meals to its patrons.

The Management Board is prepared to make initial funds available to cover capital costs. It requires that these be repaid over a period of five years at a rate of interest of 14%.

The capital costs are estimated at £60000 for equipment that will have a life of five years and no residual value. Running costs of staff, etc. will be £20000 in the first year, increasing by £2000 in each subsequent year. The Board proposes to charge £5000 per annum for lighting, heating and other property expenses, and wants a nominal £2500 per annum to cover any unforeseen contingencies. Apart from this, the Board is not looking for any profit, as such, from the extension of these facilities, because it believes that this will enable more theatre seats to be sold. It is proposed that costs should be recovered by setting prices for the food at double the direct costs.

It is not expected that the full sales level will be reached until Year 3. The proportions of that level estimated to be reached in Years 1 and 2 are 35% and 65% respectively.

You are required to

(a) calculate the sales that need to be achieved in each of the five years to meet the Board's targets;

(b) comment briefly on five aspects of the proposals that you consider merit further investigation. (7 marks)

Ignore taxation and inflation.